Paul Samuelson died last weekend, and its a fitting time to assess his economic output. People I knew who knew him never failed to note his great intelligence, which was probably off the IQ charts. Given that cleverness is probably the most important quality of an economist-respected economist, his prominence is mainly a 'he's *SMART*' response everyone has when discussing his work.
Samuelson was an economist's economist, publishing almost a paper a month in his prime. His papers were rigorous, and often invoked obscure theorems as if everyone knew them. His Foundations of Economic Analysis laid down the rigorous methodology, showing how economics can be fruitfully studied as the solution to maximization problems explicitly employing differential and integral calculus: equilibrium based on the solution to maximizing agents. Little remembered was he also stressed a 'correspondence principle', so that equilibria needed a certain degree of robustness, stability, to be important. This property was later basically ignored. He gave us our first understanding of how randomness is consistent with ration expectations, overlapping generations model, revealed preference theory, and several other major tools in the economic modeling toolkit.
But the best way to evaluate Samuelson's thinking on economics is to look at the evolution of his Principles text, which dominated the field for 30 years. He built up what was to become orthodox Keynesianism: that Government spending was basically the same as Investment (in that old C+I+G), in that both added to the capital stock. Via the Multiplier, Government spending magically created 3 times its spending in output. This implied that expenditures were almost always a free lunch. He focused on the Paradox of Thrift, the idea that economies tend to save too much, retarding growth, and necessitating government deficit spending when below full employment (which is always the case in real time). He believed private enterprise is afflicted with periodic acute and chronic cycles in unemployment, output and prices, which government had a responsibility to alleviate. "The private economy is not unlike a machine without an effective steering wheel or governor," Samuelson wrote. "Compensatory fiscal policy tries to introduce such a governor or thermostatic control device" (Principles, 1948)
Samuelson generally thought taxes were innocuous at worst, but often morally just, and productive. Several editions displayed a chart showing that poor, underdeveloped countries had a tendency to tax less, relative to national product, suggesting causation (Principles, 1958). He thought the Laffer-curve was incorrect, and that greater progressivity to taxes would not only stimulate the economy directly (because the rich consumer less than the poor at the margin), but taxes might actually make some people "work harder in order to make their million."
He emphasized market failure as endemic to capitalist systems, including imperfect competition, externalities, inequities, monopoly power and public goods. Samuelson pointed out that the government could take of "an almost infinite variety of roles in response to the flaws in the market mechanism" Explanations of market failure deserve a counterbalancing discussion of government failures, which are not difficult to document, but this was not considered very important to Samuelson, relatively.
Just before the fall of communism in the thirteenth edition (1989), Samuelson and Nordhaus declared, "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive." Six years later in the fifteenth edition (1995) they noted that Soviet Communism was a "failed model". He did not have much to say about the free market success stories, from West Germany's post war recovery, or the success of countries Korea, Singapore, Taiwan, Indonesia, Malaysia and Thailand. If it couldn't be traced to a government program, it wasn't that interesting.
He made market perfection the enemy of the good, ignoring the government failures Public housing, international aid, Africa, India, the lowered labor participation of African Americans, higher levels of debt, the destructive effects of unions on the US steel and auto industries, all irrelevant, relative to various market failures. His students include Krugman and Stiglitz, who clearly were influenced by Samuelson's natural skepticism of the market.
But, he had good faith, and was a disciplined, honest, and thoughtful person. He avoided engaging in the ad hominem and bad faith assumptions that are so common in Krugman and Stiglitz's op-eds (Samuelson wrote op-eds for Newsweek for a long time). Yet, he was wrong about the biggest issues in his main area of expertise. To me, this highlights that the really important truths in life aren't black and white truths you can discern through sufficient effort and intelligence. It's like giving a random person a big computer with a googleplex of RAM, CPU, and access to the internet: that person will not become productive with a high probability. Getting right answers seems based on some pre-deliberative assumptions, prejudices, and there I think his intuitions led him astray. Rest in peace.
Intelligence and wisdom are two different things. Right now we have way too many "intelligent" academics formulating economic policy and no one who has actually run a business (a real business, not a bank) having any input whatsoever.
It is not the lack of business experience that creates an idiot like Samuelson and his progeny. It is because one's ideas in politics and economics are ultimately determined by one's view in ethics and epistemology.
Altruist ethics and irrational epistomology will lead you to socialism. Modern economics (especially Keynesianism) can be viewed as a massive rationalization for socialism. The fact that Mises proved it can not work is irrelevant because socialism is a moral ideal that determines one's economics.
Thought I read somewhere that although Samuelson was a proponent of efficient markets he held a large position in BRK, could someone check me on this??
"His papers were rigorous, and often invoked obscure theorems as if everyone knew them."
Understatement of the year!
Samuelson is the conduit most to blame for the false assumptions that the popular press and politicians have about economics. He didn't invent liberal Keynesian economics, but he seemed to have turned their prejudices into accepted "truths" by reaffirming their intellectual respectability.
May the future of econ 101 textbooks be better than the past.
If Samuelson is not dead, he will surely kill himself after reading this obituary.
[b]I come not to praise Samuelson but to bury him[/b]
As late as 1989, in the 13th edition of his best-selling college textbook "Economics," Paul Samuelson wrote, "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."
The fondness of mainstream economists for socialism is seen in Samuelson's "Economics." In the 10th edition, published in 1976, Samuelson wrote, "It is a vulgar mistake to think that most people in Eastern Europe are miserable." Samuelson put the Soviet gross national product at "between one-half and three-fourths of ours in size." Graphs in the 10th and 11th editions showed Soviet GNP surpassing U.S. GNP around 2010, based on "best expert opinion."
A graph in the 12th edition, published in 1985, showed the Soviet economy growing 4.9% a year since 1928 compared with 3% a year for the U.S. since 1929. By the 1970s, however, there were signs that all was not well in the worker's paradise. The Soviet Union began importing vast amounts of U.S. grain. It was also borrowing heavily from foreign sources.
Life expectancy was declining, and infant mortality was rising. By the early 1980s, 16% of live births in the U.S.S.R. were physically or mentally defective, says Herbert Meyer, former vice chairman of the National Intelligence Council.
At the same time, the U.S. conspired with Saudi Arabia to drive down the price of the Soviet's chief export - oil. More than half of Soviet export earnings came from oil sales to the West. "As the price of oil dropped, their hard currency earnings plummeted, and that was a major economic blow," Meyer said.
It was a controversial strategy - "mindless nonsense," wrote Harvard's John Kenneth Galbraith in 1984. Galbraith and others continued to praise Soviet progress, downplaying Soviet problems as no worse than the West's.
Lester Thurow of the Massachusetts Institute of Technology wrote in 1983, "While no economist would trade the American economy for the Russian, it is not at all obvious that the crisis there is worse than the crisis here."
In the mid-1980s, Shelton analyzed Soviet financial statements and found that the Soviets were heavily in debt, and sinking deeper - with the help of Western banks. Soviet debt jumped 50% in two years, 1985 and 1986. Why did they need the money?
"Their books showed that they always ran a perfectly balanced budget. That should have been a tip-off. It was too perfect," Shelton said. "In fact, they were dead broke. It was really a case of bankruptcy."
At its end in 1991, the Soviet Union was living off Western loans. That couldn't go on forever, and it didn't.*
(*Back in the US...Back in the US...)
From Hayek's 1974 Nobel acceptance speech
On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.
Pat, If you mention Hayek once more, Falken will write his obituary with a special reference to stimulus spending.
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